Introduction
Fraud can plague any business organizations report losing 5 percent of their annual revenue to fraud. But small businesses exhibit specific vulnerabilities. For starters, they often lack the resources to sufficiently implement internal checks and balances for their accounting systems. Additionally, those performing the accounting duties are likely assigned multiple tasks that may or may not fall within their expertise. Finally, despite cultivating a culture of trust inside the business, the likelihood of internal fraud is just as high among long-term employees as with contract workers. This makes sense when you consider that small businesses are powered by passionate owners who invest so much of their time and energy into pursuing their dreams. They work hard, but their focus can be pulled in a thousand different directions during any moment of the day. When they experience the thrills of success and growth, they also have to be prepared to face increased challenges, such as monitoring cash flow. For these reasons, successful small business owners must maintain a high degree of crucial oversight over their financial affairs. They have to equip themselves to identify and act on five of the most common fraudulent practices and scams that can prey on them. This current study the concerns about why people commit fraud against business, internal failures that increases the risks of fraud and ways to identify and prevent fraud in businesses.
Discussion
Recent studies indicate that fraud is a big deal for any business. As pointed out by Vona (2012), the average firm loses about 6 percent of its yearly revenues to fraud. Internal fraud is something organizations need to keep in mind all of the time. When things are going well, people do not think about fraud, and that is a good opportunity for certain motivated people to commit fraud. Most people commit fraud out of greed. People who commit business fraud are often motivated by certain aspects to steal from their companies. Studies show that there are three factors that can make an employee to consider internal fraud. They include pressure, rationalization and opportunity. All these start off with different ideas.
Delegate your assignment to our experts and they will do the rest.
The pressure to commit fraud is the primary factor that makes employees to consider internal fraud. According to Hess & Cottrell (2016), bad situations lead to bad decisions and employee under stressful situations can consider fraud as an easy way to eliminate their problems. Additionally, pressure to commit fraud can be caused by other people. A spouse, relative or friend can push a person down the fraudulent path. Even another employee looking to commit fraud can pressures another coworker would be needed to complete the crime. Pressures can force a variety of human responses and sometimes that can lead to internal fraud.
Rationalization is another aspect that can make an employee to consider committing a fraud. In conformation to Mintchik & Riley (2019), rationalization comes into multiple forms and sometimes it is a justification. For instance, an employee who has not received a raise for almost ten years feels the company owes him or her, so the employee commits fraud to try and get money he or she feels is long overdue. Studies show that fraud does not have to result in the theft of big dollar amounts. An employee can justify that by stealing small amounts, what he or she is doing is not all that bad. However, in truth committing fraud is always bad, but the person committing fraud may have himself or herself convinced otherwise.
Another aspect that makes an employee to consider committing a fraud is the moment of opportunity for fraud. As explained by Aghghaleh & Mohamed (2014), the moment of opportunity for fraud is the biggest factor in the business fraud triangle. Even if an employee is under pressure to commit fraud or has rationalized the idea to the point of no return, it is impossible to commit fraud without having an opportunity to do so. For instance, in the case of Jesse Grant the assistant manager of the Moonlight Cafe in Fort Collins, Colorado the opportunity for fraud presented itself. Jesse Grant was the only employee who oversee the café cash collection every day. This presented her with the opportunity to skim small amounts of money off.
The possible control failures that would have increased the risk of fraud include lack of appropriate methods to manage the businesses. In agreement with Biegelman & Bartow (2012), when businesses lack appropriate management method, they increase the chances for fraud to happen. Companies that lack a strong internal control have high chances of fraud occurrences. Lack of proper management of businesses leads to improper way of safeguarding funds, assets and identifying and managing liabilities leading to fraud. Effective internal control requires appropriate quality of internal and external reporting, which in turn requires the maintenance of proper records and processes that generate a flow of timely, relevant and reliable information from both internal and external sources.
Using the fraud triangle and the fraud scale, the perpetrators committed the fraud against the businesses due to pressure, rationalization and opportunity. Conforming to (), fraud triangle and fraud scale that can lead to people to commit to commit business frauds include pressure, rationalization and opportunity. Pressure in fraud arise when people are forced to commit frauds due to the circumstances. A person may feel pressured to do a business crime due to circumstances as such stressful money situations and being forced by other employees. Stressful money situations can lead to bad decision forcing an employee to commit fraud. Additionally, pressure arises when another employ forces one to complete a fraud. In term of rationalization, an employee justifies stealing by feeling he/she deserves more. Opportunity to commit fraud arises due to lack of strong internal controls in a business.
Referring to the fraud prevention chart in Alberecht et al (2018), the business owner did not effectively implement a comprehensive approach to fighting fraud. For instance, the business owner lacked a strong internal control system that can effectively identify fraud and prevent it. The business owner lacked a comprehensive internal monitoring that provides oversight and policies such as fraud-risk management.
Besides, business owner did not create a culture of honesty, openness, and assistance or eliminate fraud opportunities. This is proven when an employee that reported the fraud incident of the previous manager getting fired under unclear circumstances. The other employee despite knowing the fraud committed by Jesse Grant did not report due to the fear of getting fired.
The business owner should have implemented detection strategies. The business owners should have used surprise audits, internal audits and management reviews to ensure the employees and the manager follow all the right procedures (Henry 2016). The business owner should also have regularly visited the premises to ensure everything is being done right.
Ways to reduce business fraud includes segregating accounting duties, effectively knowing employees, maintaining internal controls, scrutinizing business bank accounts and regularly auditing the books (Rodgers et al. 2015). Also, proper training of employee to prevent fraud, protecting credit card information and checking into every case prevents business fraud.
References
Aghghaleh, S. F., & Mohamed, Z. M. (2014). Fraud risk factors of fraud triangle and the likelihood of fraud occurrence: Evidence from Malaysia. Information Management and Business Review , 6 (1), 1-7.
Biegelman, M. T., & Bartow, J. T. (2012). Executive roadmap to fraud prevention and internal control: Creating a culture of compliance . John Wiley & Sons.
Henry, L. (2016). Fraud prevention: An effective control environment can deter or minimize the occurrence of fraudulent activities. Internal Auditor , 73 (2), 17-19.
Hess, M. F., & Cottrell Jr, J. H. (2016). Fraud risk management: A small business perspective. Business Horizons , 59 (1), 13-18.
Mintchik, N., & Riley, J. (2019). Rationalizing Fraud: How Thinking Like a Crook Can Help Prevent Fraud. The CPA Journal , 89 (3), 44-50.
Rodgers, W., Söderbom, A., & Guiral, A. (2015). Corporate social responsibility enhanced control systems reducing the likelihood of fraud. Journal of Business Ethics , 131 (4), 871- 882.
Vona, L. W. (2012). Fraud risk assessment: Building a fraud audit program . John Wiley & Sons.
